ASK THE EXPERTS: Will the TALF Program Benefit Debt Buyers?

Ask the Experts is an interactive section that allows insideARM.com readers to ask direct questions to the experts at Kaulkin Ginsberg. Director David Lavine addresses a reader’s question on the potential impact of the Federal Reserve’s TALF program on debt buyers.

Question: What Impact will the Federal Reserve’s TALF Program have on Debt Purchasers?

Answer: (from David Lavine, Director at Kaulkin Ginsberg)

The Term Asset-Backed Securities Loan Facility (“TALF”) presents potential positive market impact for debt purchasers.

TALF currently targets “AAA” asset-backed securities issued in 2009 that are backed by consumer debt such as credit cards, auto loans and student loans. A pending expansion of the program would cover a broader range of securities as well as previously issued securities (prior to 2009) to include certain mortgage backed securities. The joint Treasury-Federal Reserve program could pump as much as $1 trillion into the ABS market. Debt purchasers, depending on structure and affiliation, may be direct participants in the program.

TALF will likely have an uneven and modest impact on the credit and debt markets in its early days. Once fully implemented, TALF might stimulate the marketplace for less liquid securitizations; this will potentially result from TALF-funded purchases in the marketplace including those currently illiquid pools. Inherently, this will benefit the credit card securitization market as it principally pertains to existing pools. There are an estimated $80 billion of scheduled maturities of credit card securitizations in 2009. Any preemptive stabilization of this currently distressed, illiquid marketplace would serve as a benefit to debt purchasers.

The current illiquidity and market distress has caused erratic pricing, outright failure of multiple sponsors, and uncertain supply of accounts for debt purchasers. Stabilization of the marketplace for these pools would alleviate these demonstrable business risk factors for debt purchasers. 

However, TALF presents significant limitations: inflexible loan terms and short term maturity (currently 3 years, proposed to extend to 5 years), which is no real benefit to originators of new securitizations in funding riskier subordinated tranches.

When implemented, an additional benefit of TALF to debt buyers – specifically those with financial reporting requirements – is the more favorable accounting implications. The entire “mark to market” & fair value debate (maintain current requirements, ease them or cease outright) has been greatly exacerbated by the impact on balance sheets from write-offs caused by accounting adjustments.  Easing the fall in the value of the securities would potentially be supportive to ongoing and future financing endeavors of debt purchasers.

In summary, TALF presents a potential and hopeful stabilization of a highly distressed market. Direct potential participation could prove highly lucrative. Indirect benefits will hopefully include price stabilization, global economic stimulus and facilitation of impairment challenges.

David Lavine is the leading valuation expert in the credit and collection industry. He provides business valuation and expert witness/litigation services to select clients. For more information about Kaulkin Ginsberg’s services for debt buyers, contact us at hq@kaulkin.com.